LEUNG CHACK v. ASIA INSURANCE CO. LTD.

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JUDGMENT

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Hon. Yang, C.J.:

1. This is an appeal from a judgment of Deputy Judge Z.E. Li sitting in the District Court dismissing a claim by the appellant workman against the respondent insurance company.

2. The facts are not in dispute. The appellant sustained personal injury at work on the 17th July 1987 whilst in the employ of one Cheung Woon-kit who was a sub-contractor engaged by one Lee Wah trading as Regent Interior Design. I shall call Mr. Cheung the Sub-contractor and Mr. Lee the Principal Contractor. On the 25th August 1989, the appellant obtained judgment against both the Principal Contractor and the sub-contractor for the sum of HK$234,132 plus interest and costs.

3. As the judgment had not been satisfied, the appellant in the court below sought satisfaction from the respondent as insurer of the Principal Contractor, pursuant to s.44 of the Employees Compensation Ordinance, Cap. 282 (the ECO).

4. As Mr. Sarony, counsel for the appellant, argues, the central issue here is whether on a proper construction of the policy of insurance in this case and the provisions of the the ECO, the Ordinance has the effect of fixing the Principal Contractor with liability under the contract to the appellant, an employee of the Sub-contractor.

5. In the court below, the respondent whilst admitting that it had issued an Employees' Compensation Policy dated the 1st April 1987 to the Principal Contractor, however maintained that the terms of the Policy did not cover the Principal Contractor's liability towards employees of sub-contractors. As the appellant was the employee of the Sub-contractor and not of the Principal Contractor, the respondent was not liable under either the ECO or the Policy.

6. The gist of Mr. Sarony's arguments is that the Policy must be read together with the ECO. On a proper reading of the ECO and the Policy, the respondent is liable to pay.

7. By the second paragraph of the Policy, it is stipulated that the Policy covers "any employee in the Insured's immediate service". There is also an exception clause in the Policy which stipulates that the insurance company shall not be liable in respect of nine different types of liability including the insured's liability to employees of contractors to the Insured. It seems indisputable that, on those stipulations, only the direct employees of the Principal Contractor are covered. Those stipulations cannot be displaced or be given a different meaning except by the clearest words in the other parts of the Policy.

8. Mr. Sarony for the appellant seeks to derive assistance from the words in bracket in the third paragraph of the Policy relating to legislation in the Schedule, i.e., the ECO, through which, according to his argument, the ECO fixes the principal contractor with liability. The third paragraph reads:

9. He then took us through several provisions in the ECO to show how he arrived at the conclusion.

10. Section 5(1) deals with an employer's liability to pay compensation to his employee for personal injury by accident arising out of and in the course of the employment. It is common ground that the relationship here is between an employer and an employee in his direct employ.

11. Section 24(1) seems crucial to Mr. Sarony's argument. It provides:

12. Section 40(1) provides that no employer shall employ any employee in any employment unless there is in force in relation to such employee a policy of insurance. It is conceded that the principal contractor cannot be convicted under s.40(2) if the employee of a subcontractor had worked on the principal contractor's premises: vide Woo Kin-wah v. Somec (H.K.) Ltd. et al [1991] 18 (Civil), unreported, per Fuad, V.-P., at p. 10. This section does not assist the appellant either.

13. Section 42 provides that certain conditions in the insurance policy negativing liability shall have no effect. It was conceded that this section is not relevant.

14. Section 43(1) provides that where in relation to an employee there is in force a policy of insurance for the purposes of Part IV ( - on Compulsory Insurance) and the employer of the employee becomes liable to pay any sum under the ECO or independently of the Ordinance in respect of an injury to the employee arising out of and in the course of his employment, such sum shall forthwith become due and payable by the insurer.

15. The arguments for the appellant therefore seek to fix the Principal Contractor with liability by reading together the words in brackets in the third paragraph of the Policy and Ss.24(1) and 43(l). In my judgment, it is impossible to ignore the words in the second paragraph of the Policy restricting the insurance company's contractual liability to immediate employees of the insured, without doing violence to the language in the Policy and in the Ordinance.

16. Section 24(1) deals with the relationship between the principal contractor and the sub-contractor's employee. By this sub-section, the former is liable to pay compensation to the latter. By the judgment obtained on the 25th August 1989, that liability was already affirmed. We do not have here a situation where compensation is claimed from or proceedings are taken against the principal contractor. Here compensation is claimed from and proceedings are taken. against the principal contractor's insurance company.

17. Section 43(1) deals with an insurance policy in relation to an employee, and the liability of the employer towards the employee. In this case we deal with a different relationship, that between a principal contractor and his sub-contractor's employee.

18. In my judgment, it is not possible to construe the Policy the way Mr. Sarony suggests.

19. Grounds 1 and 2 of the Appeal therefore fail. I do not find anything of substance in Grounds 3 and 4 and proposes to say nothing further about them.

20. The appeal is dismissed.

Hon. Fuad, V.-P.:

21. I agree that for the reasons given by my Lord the appeal should be dismissed.

Penlington, J.A.:

22. With respect to the trial judge's lengthy and careful consideration of the legal difficulties raised here, there is in my opinion only one issue which calls for a decision. While it is a simple point it is by no means easy to decide.

23. For the appellant to succeed he must rely on Sections 24 and 43(1) of the Ordinance He must first of all show that by the terms of Section 24 he has, for the purposes of Part IV of the Ordinance, become the principal contractor's employee so that he can then say that he comes within Section 43(1) in that here "in relation to an employee there is in force a policy of insurance for the purposes of this part". If he can overcome that hurdle it matters not that the policy itself states that it purports to only cover the principal contractor's direct employees as Section 43 provides that compensation payable to "an employee shall be paid by the insurer "notwithstanding anything to the contrary in the policy of insurance".

24. In my view the substantial amendments to the Ordinance made in 1982 which included Section 24, as now worded, and Section 43, were to overcome the problem raised here. The appellant was working for a small sub-contractor who was un-insured, as so many are, and who is not worth suing. He is entirely without remedy if he could not look to the principal contractor. Section 24 provides that he can do so. Here however we are told that the principal contractor is also worthless, again by no means an unusual event, but he does have a policy which clearly covers his liability to his own direct employees. Was it then the intention of the legislation that not only would the principal contractor be liable to pay compensation to his sub-contractor's employees but his insurance cover was also extended to cover them.

25. There are two very fundamental principles of statutory interpretation which are here in conflict. One is the "purposeful" rule as set out in Section 19 of the Interpretation Ordinance, Cap. 1, "An ordinance shall be deemed to be remedial and shall such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Ordinance and its true intent, meaning and spirit". The other principle, however, is that legislation should not be taken to impose financial liability on any person unless it does so in clear and unambiguous terms. Here the respondent says it only contracted to ensure the principal contractor's direct employees. It would be penalised if that is deemed to include those of a sub-contractor.

26. In my view the wording of Section 24 is such that it was the intention that the employees of the sub-contractor should, for the purposes of claims under the Ordinance, he considered exactly the same as direct employees. The section says that "the principal contractor shall be liable to pay to any employee employed by that sub-contractor or any other sub-contractor in the execution of the work any compensation under this Ordinance which the principal contractor would have been liable to pay if that employee had been immediately employed by him; and where compensation is claimed from or proceedings are taken against the principal contractor, then, in the application of this Ordinance, references to the principal contractor shall be substituted for references to the employer" (my emphasis)., This, it seems to me, can only mean that the intention was that, for the purposes of the Ordinance, when a claim is made the  principal contractor becomes the employer and, I think, it must as a matter of logic follow that the sub-contractor's worker becomes his employee. I find myself unable to read the section in any other way. I also consider that, while the respondent here is not the principal contractor' but is his insurer, the claim is, in the context of Part IV of the Ordinance, made against theprincipal contractor.

27. If I am right in the above reasoning when one then looks at Section 43(1) and asks the   question "is there a policy of insurance in force in relation to an employee" the answer is "yes there is" even though it purports to exclude those employees who are not the immediate employees of the principal contractor. The terms of the policy cannot overcome the legislative consequence of Section 24 which makes the sub-contractor's employees those of the contractor for the purposes of the Ordinance.

28. There can, in my opinion, be no doubt that Section 24 of the Ordinance was enacted so that employers of sub-contractors, who were very often, as here, persons of no sub-stance, would have right of recourse to the principal contractor. Part IV was enacted to provide that all contractors must take out insurance. I cannot believe that it was the intention of the legislation that although a principal contractor is fixed with liability for compensation payable to his sub-contractor's employees, he was not obliged to insure against that risk. In Woo Kin-wan v. Somec (H.K.) Ltd. Fuad, V.P. posed the question of whether, if he is liable for payment of compensation to sub-contractors, a contractor could be prosecuted for failing to ensure against that liability. The answer to that question was not necessary in deciding that case and it should be noted that Section 40, which imposes the liability and the penal sanction refers to insurance against both compensation under the Ordinance and at common law. As I understood Mr. Sarony's position here he did not concede that a prosecution was not possible for failure to insure against claims under the Ordinance but that it would be very unlikely and only if the principal contractor knew his sub-contractor was not insured. I would agree.

29. The practical difficulties faced by principal contractors and their insurers if sub-contractor's employees become the principal contractor's employees for the purposes of the Ordinance, and therefore must be insured, have been stressed and clearly in the case of a contractor working on a large-scale undertaking with many sub-contractors, there may be problems preparing a correct insurance proposal to be drawn up and for the insurer to be fully aware of the risk he is being asked to cover. I am not at all sure however that these would be insurmountable. It seems to me to make little difference if any particular part of a job is to be done by the contractor's own employees or by a sub-contractor. The principal contractor assumes a liability for his own employees when they are engaged to ensure against both claims under the Ordinance and at common law. He assumes liability in respect of compensation claims as soon as a sub-contractor takes on an employee. Section 24(2) provides that he may recover what he has to pay from the sub-contractor and as the sub-contractor also remains liable to insure his employees, if the principal contractor is satisfied that such insurance has been taken out, which will normally be the case, he and his insurers will be protected. If, however, he does not so satisfy himself he may be assuming a liability against which, if I am correct, he must be insured.

30. I consider that when Section 24 and Part IV of the Ordinance were enacted the intention was to overcome the situation in which the plaintiff here finds himself; the employee of a small sub-contractor with no prospect of recovery of compensation from his immediate employer, from the principal contractor or, unless Sections 24 and 43(1) are to be read as I think they should be, the principal contractor's insurer. I am of the opinion that that was achieved, albeit not in words which made the position as clear as they might, by making the sub-contractor's employees those also of the principal contractor, I again emphasise, for the purposes of the Ordinance. That being so I consider there is "a policy of insurance in force in relation to an employee" and pursuant to Section 44 of the Ordinance the plaintiff is entitled to sue the defendant as the insurer of the principal contractor. I would allow the appeal and substitute a judgment for the appellant.

31. I have had the advantage of reading in draft the opinion of the Hon. Chief Justice whose views on this matter are shared by Fuad, V.P. I regret I find myself unable to agree with that opinion but if it was the intention of the legislation that principal contractors should be liable to insure against their liability to sub-contractors' employees and that intention has not been carried out in the Ordinance, this should be a matter for urgent consideration.